Commodity Wrap - Natural Gas, Gold, Coffee, Copper (08.12.2020)

Natural gas: 

• In spite of forecasts suggesting freeze, weather in the United States remains fine

• US natural gas demand remains below expectations. However, LNG exports rebounds

• Forward curve has flattened significantly

• High open interest on December contracts poses threat for market bulls in case better-than-expected weather conditions continue

• A rollover will occur next week. However, it will be a minor one

Open interest on December contracts is high, indicating possible sell-off amid upcoming rollover (decreasing number of positions). Source: Twitter (@BrynneKelly)

The curve has flattened significantly towards moderate contango. It suggests that the market overestimated potential demand at the beginning of the heating season. Source: Twitter (@BrynneKelly)

Natural gas prices broke below the support level, marked with the neckline of the head and shoulders pattern. At the same time, prices bounced off September low, even though seasonality indicates further declines (even until the end of December). Heavy declines occurred in January-February period, and even January-March period, in the previous years. However, these often were the result of negative rollovers. Currently the forward curve suggests that the rollover will be minor. Source: xStation5

Gold:

• Gold prices climbed to 2-week highs

• V-shaped recovery following declines in late November

• Gold broke below local lows from late September and early November, however it is still to approach the upper limit of the downward channel and the 50% Fibo retracement of recent upward move

• Huge divergence with EURUSD. TNOTE is currently falling, which might limit bulls’ strength

• Gold bulls count on further monetary easing conducted by the Fed and the ECB, which might lead to price increase (despite upcoming vaccination programmes)

• Long-term seasonality suggests that the price reached a local low

ETFs have stopped selling gold, which is reflected in the recent price growth. Apart from that, speculative positioning remains at relatively high levels despite price levels that are still relatively low. Source: Bloomberg

Weakening US dollar supports gold prices. On the other hand, 10-year yields remain relatively high (inverted axis). Potential Fed moves might push yields lower, which could be positive for gold in the next year. Source: Bloomberg

Coffee:

• Prices got stuck in a consolidation below 120 cents a pound recently

• Brazilian Real indicates that coffee prices might be higher

• It is worth noting that it was not always the key factor. Brazilian Real approached the 5.00 mark in June (USDBRL), but coffee prices lagged behind

• Inventories are still on the rise, ICE has been accepting more coffee from Brazil. Nevertheless, inventories remain near multi-year lows

• The end of hurricane season. Rainfalls in Brazil and Central America improve output outlook for the next year. 

Coffee inventories rebound quite dynamically, but remain at relatively low levels. Still, the growth rate is significant compared to previous inventories build-up cycles. Source: Bloomberg

Coffee prices remain below 120 cents a pound. The Brazilian Real is getting stronger, which might decrease the availability of coffee from Brazil. Source: xStation5

Copper:

• Rising tensions between the US and China undermine recent copper prices surge

• Markets prepare for the rising importance of renewable energy and electric vehicles sectors. It might be viewed as a bubble in the short-term, but it is very prospective in the long-run. It means that these sectors will increase their demand for copper in the next years. 

• China is crucial as far as demand for copper is concerned, but markets are also focused on the US and Biden’s infrastructure plan worth $2 trillion. 

• Copper inventories on metal exchanges (both globally and in China) are extremely low

• Chinese copper imports are very high this year, but high prices might hamper the phenomenon in the short-term

• Similarly to gold, copper prices reached theoretical seasonal low

Recent inventories declines support high copper prices. Source: Bloomberg

High copper imports this year. Nevertheless, elevated prices might decrease Chinese buying power in the near-future. Current imports slide is likely to be temporary though. Source: Bloomberg